CIBP SPRINT GOVERNANCE COOP MODEL AND OPPORTUNITIES OF DIGITALIZATION
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CIBP SPRINT COCREATING VALUABL E CONTENT AND INSIGHTS FOR OUR MEMBERS GOVERNANCE COOP MODEL AND OPPORTUNITIES OF DIGITALIZATION
GOVERNANCE MODEL / About Sprint How can CIBP leverage a coordinated way for a meaningful and collaborative innovation throughout its community? Taking on this challenge, the CIBP team product trends, the SPRINT team will deep dive designed a solution: the SPRINT. in the matter with data and cases and share same report drafts to encourage CIBP members to share The SPRINT connects and engages specialists their own experience. After that, an insightful and and seniors in an international approach of practical report will be produced. innovation and technology. This is a collaboration from inside and outside CIBP members to generate Community engagement is the backbone of a knowledge, tools and experiences to be used by all successful SPRINT. Reach out to the CIBP team to members. Based on a methodology of innovation co-create the next one. sprints, our focus is to produce relevant material from within the community to serve real challenges. How does this work? After selecting a theme of innovation and technology that has multiple implications in banking and financial services, in coop models or
Executive Summary This report provides an analysis of cooperative governance, discussing the uniqueness elements of cooperative model that shape policies and practices in the relations with customers, members and the board. This report also puts a light on the impacts and opportunities of technologies in governance models. Three specialists collaborated with the discussions in this report, contributing with their researches and outlook. Mr. Eric Lamarque, author of several articles and books on the management of banks, shares his findings in building a framework to assess different governance models, considering important aspects such as number of decision-making levels and the influence and authority of each level. Mr. Pedro Andrade, a blockchain enthusiast entrepreneur, points out the opportunities towards innovation and technology, in which blockchain and digital tools can foster trust, transparency and participation in decision-making processes. Mr. Raymond Oliger, former President of Banque Populaire Lorraine Champagne and of the Fédération Nationale des Banques Populaires, draws attention to the importance of assessing coop governance model in the face of principles of cooperative governance, highlighting criteria like balance, transparency, credibility, independence and sustainability. The report gathers different references to help financial coop institutions to rethink their governance model, making possible to evaluate how their practices are leveraging coop values and to evaluate their readiness to adopt technology trends.
Index Introduction 05 Coop Governance Model 06 Technology and Governance 08 Experts Governance Models 11 Blockchain Opportunities and Challenges 14 Coop Governance and Principles 16 Conclusion and Outlook 19 References 20
DESINING APPS FOR ELDERLY / Introduction Introduction How are we taking opportunities in this dynamic era to change old systems and models? “We design therefore we become”. This quote from Jason Silva, one of the most influential In this challenging scenario, this report futurists of our time, sums up the changes we are brings us content about how building a successful facing in this digital era. model for cooperative governance, regarding the organization of decision making processes and in Based on a set of principles and values we the light of technological trends that may reshape design the best tools to match our needs, to solve our models. the problems we want; at that time. The way we get educated, the way we collaborate, the way we This is an opportunity to rethink current make our organizations last. All these tools, in the models and design new approaches to innovate end, shape the way we think, we act and interact. in our organizations. From voting systems We have designed the cellphone to overcome a that ensures that every single voice is heard to communication gap and now our devices shape decentralized control to foster trust. All based the way we interact with each other and with the on and leveraging coop values. What we design world through data. shapes us and our environment back. In the end, we design therefore we become.
GOVERNANCE COOP MODEL / Coop Governance Model Coop Governance Model Financial cooperative institutions stand for Coop governance is oriented by a set of Resilience: proximity to communities responsibility and social cohesion since their principles that also establish the constraints and help coop banks to anticipate and adapt to creation in the 19th century. Supporting their challenges in designing its model. new circumstances. Being able to change their operations, unique in the principle-based services objectives and design services in advance may and ownership model, innovative governance Proximity to customers: coop banks be essential to a faster decision-making process. models are designed as the fundamental structure are part of their communities, having a deep connection with their customers. The local support Solidarity: coop banks are deep-seated in to add value to their customers and members. stems from a dense network of branches. real economy, providing credit to households And now, the pace of technology transformation and small and medium enterprises. They is pushing forward their evolution. promote entrepreneurship at the individual Democratic Structure: members and customers have a role in the coop governance level, fostering the common good of society. Deloitte, the largest professional services model. The “one member one vote” principle network in the world, defines Governance shapes the governance structure. Sustainability: positive social impact Model as: “the mechanism used by the board comes with environmental responsibility: Coop and management to translate the elements of Trust in relations: coop banks are banks promote services and investments that the governance framework and policies into relationship banks. Therefore, trust and enables a sustainable development. practices, procedures, and job responsibilities credibility are key. Governance model builds within the corporate governance infrastructure.” trust by reducing misinformation often seen in the relation between clients, members, managers and directors.
Traditional governance model is institutions. As presented further in this report, characterized by top down decisions: setting a framework is needed to build more than a “one objectives, defining managerial activities, size fits all” model, and to create a path that will committing to results for shareholders. A central constantly help rethink a governance structure body owns local branches and subsidiaries. rooted in the coop values and flexible in order Coop governance shifts this established model: to adapt to our changing environment. bottom-up decisions set the protagonism of local branches that own the central institution. Customers become members due to ownership, being active in the definition of strategies and having their voice heard equally. Besides this common and shared structure, cooperative institutions work with a wide range of governance models. Local needs, national regulation, banking background and future interests create different identities for the
GOVERNANCE COOP MODEL/ Technology and Governance Technology and Governance The constant changes in technology in the Governance has an impact in the rapid based on data. Therefore, data governance, data banking sector impacts the business models, adoption, or not, of trending technologies for security, compliance risk and privacy are new from the traditional banks to smaller cooperative the transformation of traditional services into board issues implicating different processes, financial institutions. e-banking profile. Openness to innovation, risk operations and strategies. taking, fast decision-making and agile product Digitalization brings well-known and service development are elements shaped by digital governance: online voting, open virtual discussions and information access; opportunities over product and service the governance model. these are some opportunities that increase development. Accounts, credits and mortgage the influence and involvement of people loans are easily offered online, replacing the Which technological trends may impact the in governance processes. Adopting these face-to-face services at bank’s branches. But governance structure of coop financial institutions? technologies can decentralize dominant voices, technology also opened the market to fintechs leveraging participation of all and improve that offer customer-oriented products. The focus big data and predictive analytics: the trust. on customer experience and digital interface is ability to collect massive amount of data and attracting an increasing number of customers, predict events. This technology can improve the blockchain: decentralized storage of shifting from old “brick only” models. At last, efficiency on monitoring and tracking the usage data and transactions between links. Thanks digitalization is an opportunity for scaling up with of resources, making possible to prepare for to this fundamental element in the building of future effects like economic crisis or regulation blockchains (blocks of information identical a small investment. change. The use of information can empower across the network) a blockchain can not be groups, making decision processes faster and controlled by a single entity and has no point
of failure. Everyone is accountable in a distributed system where everybody register via a secure validation mechanism. Governance can become fully transparent and verifiable when elections and decision-making are run through blockchains. artificial intelligence: autonomous decisions in specific tasks within certain programmed parameters. This technology autonomously solves complex problems, giving faster responses than humans on credit applications or insurance pricing, based on gathered data. Virtual assistants chatbots and automated personalized review summaries are already the implementation of artificial intelligence in banking services and products. AI brings questions to managerial structure on accountability for decisions made by algorithms.
OPINION FROM EXPERTS We heard experts from different areas of study, from coop governance model to blockchain, to collect perspectives and insights that help to deep dive in understanding governance model and digitalization opportunities.
Governance Models GOVERNANCE COOP MODEL/ Governance Models ERIC LAMARQUE Eric Lamarque is a professor at the University Paris 1 Panthéon Sorbonne within the IAE of Paris where he directs the Master of Finance. His research focuses on issues of strategy, governance, organization, and performance in financial institutions. Author of several articles and books on the management of banks, he works with the general management of financial institutions to assist them in restructuring and their development strategy, carrying out expertise and study strategic assignments. He is also a member of the Supervisory Board of Caisse d’Epargne Aquitaine Poitou Charente, Member of the Risk Committee, and Director of foundations and training organizations. We had a conversation with Mr. Lamarque on two dimensions: In order to collect data and validate the about his experience with governance models and 1. the number of decision-making levels, split identification of the governance models, Mr. the impact he sees with adoption of technology. in three levels (local, regional and national Lamarque conducted 15 interviews with 8 financial Also, this article gathers inputs from two of his or central); cooperatives and received answers from 50 banks papers and a book, all references are presented at 2. the influence and decision-making to a survey questionnaire. the end of this report. authority of each level, evaluated by three criteria: the type of decision at each level, Although coop financial institutions share the effective level of autonomy and the the same coop principles, they may diverge in influence of governance structure on the a spectrum of governance models. In-depth management. understanding of the processes that govern the model is key for transparency and trust. Adding to this framework, four different interactions were investigated that contribute to In his article “Identification and valuation of the decision-making process in coop organizations: cooperative banking Models”, published in 2014, interactions between levels of management, Mr. Lamarque conducts a study using a framework interactions between governance and management for analyzing coop governance and then assigning structures, interactions between different levels performance profiles, highlighting the different of the governance structure, and interactions with coop governance models. The analyses were based members/customers.
GOVERNANCE COOP MODEL/ Governance Models First highlights from the respondents were a common set of principles. Although they are implemented differently in each coop bank, they are what distinguish them from traditional banks. 4 principles were detailed: 1 Unique practices for allocating earnings Members vote to determine the returns paid on ownership shares and evaluate the performance of general managers at the local and regional levels. Every member votes regardless of their equity share or in the amounts of their deposits. 2 Autonomy Local boards have a role and an importance in the management. There is a common strategic alignment between local, regional and national levels and the autonomy of local manager depends on the degree of oversight provided by the upper level. 3 Accountability General managers play a role of building relationship with customers and members that participate in the activities. Accountability, therefore, is an exercise of listening, providing support to members and respecting the relationships. 4 Recognition freedom and autonomy to make decisions are primary incentives to elected officers, giving meaning to the work. In the same way, customers contributions as members are valued.
GOVERNANCE COOP MODEL/ Governance Models In the end, three main governance model were identified by the cases studied: 1 Centralized governance model In this case, the organization counts on a central body with strong influence in the decision-making processes and able to push its authority across all levels. Elected members, general assemblies and boards provide assistance for management decisions made at the regional and local levels. 2 Shared decision-making model In this model, decision-making authority appears to be relatively significant at both national and regional levels. It’s a harder model to pin down given that the distribution of decision-making between levels tends to vary from one period to the next. Decisions are often built in common. In recent years regional entities have increased their level of influence on group decisions. Elected assemblies are consulted at the regional and local levels but do not set objectives. 3 Decentralized governance model local and regional level have significant authority over all key functions. The central body’s job is to monitor the performance of local entities, centralize financial data, support implementation of development strategies, and manage liquidity. This model can be broken down into two types, with decision-making authority being concentrated at either the local or regional level. Elected assemblies at the regional and local levels are consulted and may participate in making strategic decisions and defining objectives. Based on all this experience, when asked about how governance models are adapting to digitalization opportunities, Mr. Lamarque points out the better circulation of information inside the organization. Virtual tools and technologies may improve participation of members, promoting virtual proximity to general assembly, organizing voting, even remote voting to elect board members. This brings more people to discuss, increasing diversity and enabling more communities to engage in the decision-making. Digitalization when applied to these processes improve transparency, make representation more legit and strengthen relationships.
Blockchain Opportunities and Challenges GOVERNANCE COOP MODEL/ Blockchain PEDRO ANDRADE Pedro Andrade is an entrepreneur, full stack developer, emerging technologies consultant, decentralized solutions architect and instructor. He has worked as innovation and digital transformation consultant in the retail market. More recently, he has been given blockchain and smart contract trainings in Latin America and worked in a mobility ICO (Initial Coin Offering) in Austria. He uses his software development skills to bring ideas to life, mainly about positive social impact. Pedro helps organizations to understand emerging technology, mainly Blockchain and decentralized technologies, and its impacts in their businesses. We did an interview with Pedro and talked under control by any particular peer and can’t be implicate? about the changes and opportunities that frauded, participants can trust the system and organizations may find in this (still) underexplored work together. I believe that the digitalization is a great technology of blockchain. opportunity to rethink organization’s processes Other key aspect of blockchain technology to ensure that things are being done in the most 1. Blockchain may threaten some of that could inspire the creation of new models of efficient way. In the case of voting, we could the current governance systems. What governance is how incentivization is used over start by asking ourselves: when voting is the aspects of governance may be impacted by restrictions to obtain certain desired outcomes. best approach to decision-making and when it blockchain technology? The idea is to add a charge for an action instead is not? What could we do instead of voting? Who of forbidding it because the latter would require should be allowed to vote? What are the fairest The biggest impact in my opinion is allowing more control over the network. voting mechanisms? people who don’t know or trust each other to collaborate on decision-making. One very 2. Participation in a traditional A couple of examples: known example is called DAO (Decentralized governance model is proportional to the Autonomous Organization) which is basically a company share. Coop model is based We may wish to always vote for ourselves set of smart contracts that, among other things, on ‘one member one vote’ for electing in themes A and B but, because we trust a peer allow participants to submit, fund and vote for representatives. How may digitalization X on the matter C, we can leave to X all the projects. Because the source code is public, run and blockchain technologies foster this decisions regarding this matter. This delegation by many computers worldwide which are not coop principle and which changes may it mechanism can make voting process faster and
increase the quality of decisions. 4. In financial institutions, auditing suggest a framework called “5 x 5 x 5” where plays a center role in creating trust in proof-of-concepts are restricted to a maximum Quadratic voting is a procedure that allows processes. How do you see this changing cost of US$ 5000, carried out in maximum 5 voters to express the intensity of their desires in the face of blockchain? weeks by maximum 5 persons. The main goal is GOVERNANCE COOP MODEL/ Blockchain by buying voting power. So, instead of each gathering information about assumptions which participant having one vote, they could have many First generation blockchains like Bitcoin can will lead to better decisions when choosing the according to how much they care about certain be seen as a public, decentralized, distributed next projects. issues. Besides the price increasing exponentially and append-only databases. Although these we could also place other restrictions to ensure characteristics - along with some cryptographic 6. Interesting references (links, the procedure is fair and is not monopolized by mechanisms, make conventional auditing sites, articles, books) about blockchain richest voters. virtually unnecessary, it would be troublesome and digital governance that you’d like to for a financial institution to adopt a blockchain share: 3. What are the biggest challenges and like that due to privacy, law requirements and gains of adopting a decentralized model in many other factors. - Blockchain Governance: Programming decision making processes? Does it have Our Future: different implications comparing a big, What I imagine as an initial step is https://medium.com/@FEhrsam/ nationwide company and a small, local incorporating some of blockchain’s features to blockchain-governance-programming-our- one? improve the systems that are in place. For example, future-c3bfe30f2d74 having an append-only shared ledger between I think biggest companies have more to gain as financial institutions could make consolidation - Quadratic Voting: http://ericposner.com/ they are more likely to have complex governance an automatic process. quadratic-voting/ processes that could be simplified and broadened at the same time. The biggest gains are exactly 5. How can an organization evaluate its - Colony project: https://colony.io this: allowing more participation even from readiness to these trends in blockchain? outside the organization if desired. For conventional organizations it may be a The biggest challenges are understanding the challenge to adopt blockchain as it would imply decentralized mindset and the consequences of it, to decentralize at least part of the control the like: having to spread the control to participants, organization holds. It is most likely to be easier respecting the outcome of decisions, being mindful in cooperatives as they are by nature more of all the possible interactions from participants, decentralized as decisions are made collectively. correctly align the incentives to reward actors who contribute to the network and disincentivize My suggestion is always having a budget to bad actions, etc. experiment and pilot a few ideas and technologies every year. It doesn’t need to be much. In the book “Innovator’s hypothesis” Michael Schrage
Coop Governance Principles GOVERNANCE COOP MODEL/ Governance Principles RAYMOND OLIGER Raymond Oliger holds a degree in philosophy and psychology. He is the former President of Banque Populaire Lorraine Champagne and of the Fédération Nationale des Banques Populaires. He served as Vice President chair of CIBP and is a former member of BPCE Supervisory Board Mr. Oliger led a working group on governance model in CIBP in 2014. The output was a series of documents comparing models from CIBP members and other key findings regarding the interaction of coop values and governance. The group did a survey within the CIBP community that confirmed the range of governance models, shaped by their respective environment. Besides the advantage of flexibility in different models, this may bring a lack of consistency, opening an opportunity for regulators to apply the same rules as traditional financial institutions. The study brings five important perspectives that should be considered for assessing a coop governance model: 1 Balance on the Boards Representation is key on the elected board and the appointed executive structure. Considering geographic representation favours proximity, diminishing the gap of local concerns and strategy. Socio-professional balance enables cross-over between economic activities. Age and gender balance should also be considered. A balanced representation avoids keeping influence of the same groups 2 Credibility Representation is key on the elected board and the appointed executive structure. Considering geographic representation favours proximity, diminishing the gap of local concerns and strategy. Socio-professional balance enables cross-over between economic activities. Age and gender balance should also be considered. A balanced representation avoids keeping influence of the same groups
3 Transparency access to reliable information is a responsibility towards shareholders. This is fundamental for general meetings, that should be complemented by meetings held in the different locations, engaging more shareholders in discussing relevant issues to the bank. GOVERNANCE COOP MODEL/ Governance Principles 4 Independence the independence of the deliberative and executive structures should not be a challenge for coop governance. Limiting the number of mandates of elected board and making the “one member one vote” model an universally principle are options to guarantee the independence. 5 Long-term outlook the sustainability of the model, carrying for the long-term coop principles, can be achieved by management strategies. Focus on management performance in the mid and long-term, disconnect remuneration from share and results and make impossible to share reserves are options investigated in the study. But, from five to ten years ago, digital revolution shifted the analyses over the fundamental aspects of cooperative governance model. As highlighted by Mr. Oliger, they are three: participation, representation and information. Physical distance that separated members, local organizations and the central decision body shrank with the virtual boundaries of internet. The high costs for sharing information and the logistics of correspondence to voting in assemblies were replaced by accessible tools for participation and for transparency. Technology disrupts practices on the above governance perspectives and therefore may have a crucial role in nowadays assessments. Digitalization can leverage the balance on the boards reaching a wider panel not only of electors but also of candidates. Direct participation of members via digital tools and also leads to direct democracy, strengthening transparency. No organization would refuse to give access to open information to its members and regulators. Therefore, it is necessary to adopt and improve new communication channels. The challenge to adapt coop governance models are not only to the technological evolution but also to new mentalities. Mr. Oliger states then: “This revolution-evolution will prevail only if we have the ability to keep a clear vision of our fundamentals and to stay faithful to them”.
CONCLUSION AND OUTLOOK
Conclusion and outlook GOVERNANCE COOP MODEL/ Conclusion Governance requires a high level of commitment and a deep understanding of the process. For coop organizations, we must add a tight connection to principles and values. The governance structure for a coop financial institution does not have a standardized model. Expert Eric Lamarque described a framework used in assessing different models, considering important aspects such as the number of decision-making levels and the influence and authority of each level. Also, it is important to consider the relationship between different parts of the structure, such as different levels of management, governance and members. Expert Raymond Oliger also described the importance of assessing coop governance model in the face of principles of cooperative governance, highlighting criteria like balance, transparency, credibility, independence and sustainability. Rethinking governance is an opportunity to take a step towards innovation. Digital technologies leverage the chance to reinforce tools to make processes faster, more transparent and reliable to all stakeholders. Expert Pedro Andrade points out the collaboration in decision-making process that blockchain technology can foster. Values are the cornerstone that differentiate cooperative governance from traditional models. Management activities, deliberation processes and ownership are shaped by these values. Relevant cases of bigger autonomy to local branches and cases of centralized goals setting should be explored in further work, adding value to this governance discussion.
References GOVERNANCE COOP MODEL/ References Developing an effective governance operating model - A guide for financial services boards and management teams: (https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Financial-Services/dttl-fsi- US-FSI-Developinganeffectivegovernance-031913.pdf) MIGLIORETTI, Marco et all. 2018. “New Cooperative Banking in Europe – Strategies for Adapting the Business Model Post Crisis”. IAE Université Paris 1 Panthéon-Sorbonne. DEVILLE, Aude and LAMARQUE, Eric. 2014. “Cooperative Banking Report: Identification and Valuation of Governance Models”. International Summit of Cooperatives Quebec 2014. ALBERT, Stéphane and LAMARQUE, Eric. 2016. “The impact of financial regulation on policy and risk management in financial cooperatives”. International Summit of Cooperatives Quebec 2016. “Data governance: securing the future of financial services Financial Services”. Leadership Summit January 2018 https://www.ey.com/Publication/vwLUAssets/EY-financial-services-leadership-summit- 2017/$FILE/EY-financial-services-leadership-summit-2017.pdf European Association of Co-operative Banks - http://www.eacb.coop Blockchain Technology Guide - https://blockgeeks.com/guides/what-is-blockchain-technology/
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